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What happens to saving, investment, the trade balance, the interest rate, and the exchange rate when...

What happens to saving, investment, the trade balance, the interest rate, and the exchange rate when fiscal policy reduces import?

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Answer #1

Aggregate demand = Consumption + Investment + Government spending + Export - Import

If fiscal policy reduce import, aggregate demand will increase using above equation which will shift IS curve to its right thereby raising rate of interest as well as output level.

Increase in rate of interest will reduce investment level. Also, increase in interest rate will induce people to save money because they will be able to earn more interest. Reduced imports will benefit trade balance.

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